Thanks to rising oil prices, BP (LSE: BP.) shares have had a good run. Over the last year, they’ve risen about 24%.
Yet they still look undervalued. And one broker reckons they can deliver huge gains from here.
1,000p share price target
Last Wednesday (11 October), BP hosted an investor day in Denver. At the event, the oil giant raised its 2030 target for group earnings before interest, tax, depreciation, and amortisation (EBITDA) to a range of US$53bn-US$58bn.
The company also said it’s aiming to grow EBITDA from its five transition growth engines (bioenergy, electric vehicle charging, convenience, hydrogen, and renewables & power) to around $2bn by 2030.
On the back of this event, analysts at Barclays came out with a very bullish research note, saying BP shares could be worth as much as 1,000p – about 80% above the current share price.
“We continue to see material upside in the stock to 1,000p per share“, the analysts wrote.
“The message here is clear. This is not a business in decline“, they added.
Is a share price of 1,000p really achievable here? That’s hard to know.
At present, BP shares do look undervalued, in my view. Right now, they trade on a forward-looking price-to-earnings (P/E) ratio of about 7.4. That’s well below the market average (the FTSE 100 median is about 12.5).
Looking ahead, the consensus earnings per share (EPS) forecast for 2024 is $1 which, at today’s GBP/USD exchange rate, equates to about 82p.
This means that if BP shares were to rise to 1,000p next year, the P/E ratio (assuming the EPS forecast and exchange rate didn’t move) would be about 12.2.
That doesn’t seem unreasonable, given the recent strength in oil prices and their positive impact on the company’s cash flows. So that share price target is definitely possible, to my mind.
However, oil prices add some uncertainty, as always. Recently, oil prices have been elevated due to the high level of geopolitical tension globally and concerns in relation to supply.
These elevated prices have driven the BP share price higher.
There’s no guarantee oil prices will remain high however. Earlier this month, they had a bit of a wobble.
We can’t rule out further weakness over the next 12 months. If we were to see some weakness, 1,000p might be off the cards.
My view on BP
As for my take on BP shares, I think they offer a relatively attractive risk/reward proposition at the moment.
They look cheap and there’s a dividend yield of around 4.2% on offer.
That said, BP is not the first stock I would buy today. Right now, I am seeing a few more compelling opportunities in the stock market.